Steve Romick: Asset allocation – our stocks have moved – I mean, a year ago – let's go back to high yield bonds for just a moment to lead into the answer to that question. A year ago – a little over a year ago the market had completely priced in a depression for corporate bonds – a depression. I mean investor grade bonds were in the toilet, you know low-grade corporate bonds and the high-yielding bonds were in the toilet and literally had priced in a depression. Stock market, on the other had, really had not. Stock market priced in a deep recession and we had that and it just wasn't – they weren't giving things away in the stock market the same way they were in the corporate debt market.

We felt there is no way we could lose in corporate bonds. Stocks, we felt there is that risk. Since then, now there's more certainly to be lost in the corporate bonds. There is not the same margin of safety that you have in those today. Stocks weren't as attractive relative to bonds. By the way, if the bonds weren't trading where they were, the corporate bonds, back then, we would have been a bit more aggressive on the equity side.

Rekenthaler: Right.

Romick: We just didn't feel the need to take that kind of risk. Today, even though the stock market has gone up high, a lot of stocks haven't gone up that much, particularly the larger cap, higher quality companies. And that's really where we see a little more of the opportunity today. The weighted average market cap in our companies, in our portfolios has actually gone up somewhat to – exceeds now $40 billion. And we look in our book today and our equities were about 47% long, about 5% short. We have a 19% in corporate bonds. We've got another few percent in – we are doing distressed mortgage-backed today or buying whole loans in our portfolio. So we actually are buying distressed pools of loans from ResCap and Citigroup and the likes.

Rekenthaler: So, if we look out over the almost 20-year history of your fund, 18-year history or so…

Romick: You make me sound so old.

Rekenthaler: I'll take you hair anytime. Where does this asset allocation put you compared with your normal range?

Romick: We are relatively de-risked relative to normal. We have 25% liquidity in the fund today, which is actually our 17-year average, give or take, we're actually same on our liquidity. But given the 90% we have in corporate bonds, which we don't view as that high risk today, we actually are still somewhat more de-risked in the portfolio relative to our past average exposure.

Rekenthaler: So you're conservatively positioned?

Romick: Yeah.

Rekenthaler: And reason being, in addition to valuations, are there other issues that concern you?

Romick: Well, the valuations aren't so terrible. I feel they are relatively reasonable...

Rekenthaler: Not as attractive as last year.

Romick: Not as attractive, but they are not so terrible if you buy out from what the growth assumptions are going to be. But analysts on Wall Street, both the macro guys who predict what the – or estimate what the earnings are going to be in the S&P 500 or all the individual analysts who follow the industrial companies or retailers and everything else, they are perennially optimistic. Earnings estimates always come down over to – every single year. They start off with one thing and they always trend down from the other. They're rarely trending up, almost always trending down.

And we think that if you buy off on what things are going to be, things are okay. And it's not that we don't buy off on it; we just don't have a conviction buying it. There is lot of problems. We are living in a nation of entitlements, at the federal level, at a personal level. The only people who really aren't operating as entitled are the corporates. Corporates have reasonably good balance sheets. But the balance sheet of the average individual of this country is not so good. The average balance sheet – the balance sheet in the government is a disaster. The balance sheets of…

Rekenthaler: At the state levels too.

Romick: ...the states, the municipal levels, it's really, really scary. I don't think that – I don't think that people really understand how bad it is and we have to get – there is not a lot of common sense that's going on in the way people are handling their personal finances. There is certainly no common – very little common sense that's going on in Washington with respect to – there is no accountability and there is no sense for what is the return on that investment going to be at the government level. So there's a lot of money being thrown at things, and that scares us. Now, we think there's going to be some more hell hell to pay and we want to have that cash available to pick up and invest that capital when opportunity present themselves.

Rekenthaler: Perhaps the short version of this is if there is a lot of leverage on personal balance sheet, not a lot of leverage on government balance sheet, there is deleveraging that's – either we're going to have more leveraging leading to more problems or deleveraging, and deleveraging is not necessarily good for asset prices, right?

Romick: De-levering is not necessarily that good for the growth of the economy. Longer term, it hopefully would prevent another blow up in the economy. Our people are still spending pretty well in this country, and it's hard to tell. I mean right now we're so doped up. We're a nation of fiscal crack addicts, just – give me the money, give me the money, give me the money – you are the ATM machine. Let's go squeeze the house out and use that when ATM money rolls out and runs down and get the equity from our home and refinance it. We've got the money wherever we can, so you can spend it at Best Buy, wherever else you are going to spend it.

And we just need to stop spending so much. And we do have a sense of propriety about the way we live our lives, and that's not – we don't see that happening. So it's going to slow the growth down. Certainly, people will slow spending down. But longer term it would be better. We are very much in the vein of slow things down, build your savings up. Let's take the hit now. I was just talking to one of my associates in the car, and he said that – we're talking about basically like – we're like overweight people looking in the funhouse mirror where we look thin. We don't realize we're fat, we don't realize we're bloated. It's going to take the heart attack before we actually go and lose that weight, and that's what's going – we actually…

Romick: Yeah. One can only hope. But meanwhile, we're putting more money overseas as a result of it. I mean, we're committing more capital to the foreign markets, either companies that are domiciled in the U.S. with more foreign exposure or companies that are actually based overseas.